Psychology Drives Price

sspencerSteven Spencer (Steve's) Blogs1 Comment

RIMM reported after the close today.  It traded up over 20% from its closing price.  You are going to read a lot of articles about how they “blew away” expectations and gave great guidance.  The articles will assign these as the reasons for RIMM’s explosive up move after the market closed.  Really?  I don’t think so.  Do you believe that if RIMM reported three weeks ago that it would move 10 points higher in the after market?  Of course not.  Three weeks ago the world was coming to an end!  A good earnings report would lead to maybe a 2 or 3 point up move followed by an afternoon selloff.  But we have climbed the “wall of worry” for the past two weeks.

Market psychology has changed.  Investors are now beginning to think more about potential upside.  They look at RIMM 100 points off its high and still earning lots of cash.  Maybe it can run 20, 30, or even 40 points?  Each time that the market sells off in the afternoon or has a large gap down in the morning there has been no follow through to the downside.  The market continues to creep higher.  There is a shift in psychology.  Some of the bigger market players are less afraid to put money to work (and boy were they afraid for quite some time).

One of the traders in my row told me this morning that some of the larger hedge funds are planning on shorting the market now that the SPYs are at 84.  Great news.  We can see what type of pull back this selling will produce.  If this new round of selling is unable to move us below 78 on the SPYs we will continue to push higher.  Possibly another 10 to 12 points on the SPYs.  Go back and check the charts for the S&P 500 in the early 1930s.  There were several 50% up moves in the heart of the Great Depression.

With all of the above in mind I will be trading RIMM tomorrow.  In the after hours it closed a little above $60.  Perhaps it won’t trade much higher tomorrow.  But I am open to the idea that in the coming days and weeks it may have another 10 to 15 points of upside.  I will watch the tape closely to judge the strength or weakness of the stock and will trade accordingly.

RIMM 04-03-09

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